Nagarro Se

Good afternoon everyone and thank you for joining us today for Nagara SE's Q3 9 month 2025 earnings call. Before we begin let me briefly explain how you can submit a question. During the presentation you can register a question by pressing star followed by 1 on your telephone keypad. If you change your mind please press star followed by 2. If you've joined us online you can submit a text question by the Q&A button on your browser. Please limit yourself to two questions initially. You may re-enter the queue and and we will return to any unanswered questions if time permits. With that, it is my pleasure to hand you over to Michael.

Great. Thank you, Sammy, and good afternoon, everyone. My name is Michael Knapp, and I'm part of the investor relations team at Nagaro. If you have not yet received a copy of our Q3 2025 earnings release, you can find it, as well as a copy of today's presentation, in the investor relations section at nagaro.com. Joining me today is Manas Human, our co-founder and custodian of entrepreneurship. Manas and I will be covering the results and strategic updates for the quarter. Before we begin, please note that some statements made during this call may be forward-looking and are subject to risks and uncertainties, as outlined in our earnings release. Additionally, please refer to the release for important information regarding non-IFRS measures. And with that, I'm pleased to hand you over to Manas.

Thanks, Michael. Once again, welcome everyone and thank you for joining us on this earnings call. We are taking a slightly different approach this quarter and hosting just one combined call so that we can expand on our prepared remarks a little and still have time to address your questions. We'll start by briefly highlighting our strong Q3 results, but perhaps even more importantly, underscoring the important and sustained actions we have been taking to address investor concerns, improve corporate governance, and enhance our financial reporting and transparency. I also want to discuss how we have set the stage to drive better shareholder returns through improved execution and a disciplined capital allocation strategy. The operational changes we have made are already driving measurable improvements in our results, which perhaps are being overshadowed a bit at this time by a subdued demand environment and FX noise. but we believe we are still at the very early stages of showing the benefits from some of these new initiatives and processes that we have put in place, especially on the sales execution side. I'd also like to talk more about the future and in particular about our vision of fluidic intelligence. We would like to explain that to you. We are promising our clients significant productivity improvements by unlocking the intelligence that already exists within their organizations We are removing barriers for our clients between their people, their data, their decisions, creating low friction enterprises that adapt faster and execute with clarity. And I'm excited to say that we're already seeing a very positive response from our clients around this promise, this theme of productivity improvements. And we will present an example of this. And finally, we'll be happy to take your questions. Now, we are pleased with our execution in Q3, which demonstrates the strength and resilience of our business model, despite all the ongoing macroeconomic challenges. Our teams delivered exceptional service to our clients, and we focused intently on operational discipline. During Q3, our revenue growth accelerated and was tracking to the guidance we provided last quarter. This is a testament to the stability of our customer base and the confidence our loyal customers place in us. Importantly, we're also seeing significant outperformance in profitability. Both our gross margin and adjusted EBITDA margin are ahead of expectations, reflecting the positive impact of the efficiency measures that we have implemented. In fact, the adjusted EBITDA margin of over 17% is the highest level we have seen since 2022. This margin expansion positions us well to generate strong earnings and cash flow moving forward. Over the past few quarters, we have prioritized making fundamental structural improvements to the way we operate. To that end, we've taken a number of decisive actions to improve corporate governance, financial reporting, and transparency. We're already seeing tangible improvements in our internal process and operations. I'll talk more about this shortly. But these changes are not simply about meeting regulatory requirements. They're about building a world-class company, about strengthening the foundation of trust and operational excellence that will support our growth ambitions for years to come. Our success is directly linked to our client success and we are intensifying our efforts to deliver quantifiable business impact to help them win in their markets. We're actively showing clients how we drive significant measurable improvements to their businesses. We aren't just selling hours, we are pitching outcomes. And importantly, clients are responding. The quality of our relationships is improving, evidenced by the increase in client satisfaction scores and the strong pipeline of new high-value contracts. This focus on value creation ensures that our services remain essential and deeply embedded in our clients' strategic initiatives. Finally, in line with our disciplined approach to capital allocation, we remain committed to enhancing shareholder returns. We are pleased to announce that we are extinguishing approximately 75% of our treasury shares and also buying back 20 million euro worth of stock. We believe there's a clear disconnect between the current share price and the intrinsic value of our shares. The current share price, even after today's jump, does not reflect our strong financial performance or expanding margins and improving operational structure. We believe the buyback program is one of several tools we are using to deploy capital while signaling our confidence in the company's long-term outlook. We are confident that as we continue to execute on our strategy, the market will recognize the sustainable value that Nagarro has been building, and in fact, has been building for a couple of decades now. Digging a little deeper into the numbers, we are pleased to report that our Q3 revenue growth reached 9.4% year-over-year at constant currency. This solid performance in a subdued demand environment keeps us on track with the revenue guidance we provided earlier. Turning to profitability, our focus on operational discipline continues to yield impressive results. Our Q3 gross margins came in at 33.1%, which is over 300 basis points better than the guidance that we have provided. This significant outperformance is a direct consequence of our increased focus on margin expansion through targeted initiatives, including the successful implementation of the margin support program that we have earlier talked about. This program has optimized resource allocation, improved utilization rates, and driven efficiencies across our organization. Our Q3 adjusted EBITDA margins were over 17%, which is above the high end of our guidance range. These strong margins are a clear highlight of our quarter, and underscore our deliberately improved operational efficiency and our ability to translate top-line growth into meaningful bottom-line results for our shareholders. And all in all, we are maintaining the guidance we provided last time. But when you look at our tracking to our guidance for 2025, please also keep in mind the significant headwind presented all year by foreign exchange rates, especially the conversion between dollars and euro, To put this in perspective, if we were to adjust our revenue for the full nine months to account for the foreign exchange impact from the dollar and euro, our revenue would be approximately 790 million, which would have placed us right near the midpoint of the initial 2025 full-year guidance that we had issued back in January 23rd. Further, as you will see on the next slide, if currency exchange rates had not moved, our adjusted EBITDA would also have been at or above the midpoint of the initial 2025 full-year guidance we issued in January. This ability to deliver what we promised at the start of the year, despite the highly volatile environment, underscores the fundamental strength of Nagaro's business and the fundamental strength of Nagaro's positioning in the market, and the fundamental strength of our relationships with our clients. Beyond these financial metrics, a long-term focus on delivering a superior client experience remains the primary driver of our sustained success, our commitment to our intimate partnership, innovation, and measurable outcomes for our clients. By deeply understanding their strategic challenges and exceeding their expectations, we ensure that our services remain indispensable and embedded in the long-term digital transformation roadmaps. We believe the quality of our client relationships is our most valuable long-term asset. We believe that we can double our revenues well within this decade simply by doing more for the 187 clients we already have today that generate more than 1 million euro in revenue, each with us.

We've lost connection to Manas. Please bear with me while I regain connection.

cutting out of this call. Let me just talk again on the slide, and I hope I'm not repeating my words too much. I want to take a few minutes to provide a clearer view of our underlying profitability. We recognize that our reported adjusted EBITDA figures for recent quarters have been significantly impacted by fluctuations in foreign exchange rates, specifically related to non-cash impacts on loans between different companies within the Nagarro Group. Here I want to highlight what our adjusted EBITDA margins might have looked like for the past three quarters if we had corrected for this FX impact on intra-company loans. The resulting adjusted margins would have been materially higher and more representative of our sustained and resilient operational efficiency. We believe that this adjusted view provides a better picture of the fundamental robust earning power of our business than the numbers that we have reported. This is also tangible evidence that the margin discipline we have been driving throughout the business is taking hold. We have now started to work similarly to elevate our sales execution. We are confident that as we continue to embed these operational improvements, the strength and stability of our business will shine through regardless of market conditions. Now, as you know, we have taken a number of actions over the past several quarters to address investor concerns, to improve our corporate governance, and enhance our financial reporting and transparency. I want to highlight some of these by putting them all on one page. First, KPMG was appointed as Nagarro's external auditor. KPMG approved the 2024 annual financial statements without qualification, hopefully putting to rest many of the allegations that have been made against the company since we have been public. Working with a Tier 1 auditor has also led to enhanced reporting and disclosures, including how we account for purchase price allocation for deals and a combined management report that aligns to the specific broad topics defined by GAS 20. Then we developed new programs to drive a basic level of profitability across our business units and introduced an expanded bonus component for senior people linking compensation directly to the company's margin performance. And now we are expanding that incentive link to growth. Then we added three new members to the supervisory board with outstanding backgrounds as leaders at global companies. Martin Enderly is an experienced chairman. Jack Clemens is an excellent chair for the audit committee, and that's having an impact. And then Hans-Paul Bjorkner has been an excellent mentor and sparring partner for me in his role as the chair of the strategy committee. And all of this change has been fantastic. Next, we have outlined a commitment to a disciplined capital allocation policy that included share buybacks, dividends, and M&A. We have done all of these. We bought back 50 million worth of stock to date. We intend to buy back another 20 million euro as we announced this morning. We also paid out a 12.6 million dividend and continue to pursue smaller tuck-in acquisitions We are on track to announce soon a very small but meaningful acquisition in the Japan-India tech services corridor. So that's that. And then we have some more good news this week. Just a couple of days ago, our sustainability commitment was validated by an EcoWard as Gold Star rating, which is up from bronze that we had. This places our sustainability management system in the top 5% of assessed companies. And I would like to congratulate the Nagaro team that worked on this. We continue to uphold our dedication to becoming a more sustainable organization through ambitious science-aligned climate targets following the science-based target initiative. We have run a CFO search process and should have good news for you soon on that front. And finally, Nagarro has been developed from the first day on strong principles of ethics and full regulatory compliance. But in order to ensure that even in the decades to come, we are Continuing to maintain the highest standards of integrity, compliance, and operational resilience, we are further enhancing our processes and governance frameworks across the organization.

Now, our customer diversification across industries continues to provide both growth and stability.

But in the meantime, there has been an evolution in our thinking, given the tighter market conditions that have now persisted for a couple of years. We are going to be a bit more deliberate about targeted growth and more deliberate about where we place our bets. We're going to give a little extra emphasis in terms of sales efforts where we have the right to win in those verticals and topics where we feel we can go big. While we do this, we continue to explore meaningfully our big secular growth opportunities that we have outlined in past calls in Japan and for Japan Inc. around the world, German Mittelstand, in hardware and IoT and now in a fledgling way in the supply chain. We are developing playbooks around many of these topics and are improving our discipline around these. We see this improved discipline of execution and improved focus on commercial excellence as a new phase in Nagaro's evolutionary journey.

Just a few words on our geographies.

You know that our Diversification extends to geographies as well. The U.S. and Germany remain of top importance for us. The Middle East has been a nice addition to growth in the last few years. We fully expect Japan to play this role in the coming years. Michael, with that, do you want to now discuss the balance sheet and cash flows?

Absolutely, Manas. Thanks. The chart on the left shows our financial position at September 30th, 2025. Financial liabilities were 301.2 million euro and lease liabilities were 70.8 million euro. Our cash balance remained strong at 129.4 million euro, implying net liabilities of 242.6 million, which leads to a net leverage ratio of 1.7 times. The company's liquidity position at the end of the nine-month period was comfortable with working capital of 223.5 million euro. In the interim consolidated statement of cash flows for nine months of 2025, Nagaro has included the unrealized loss on intergroup loans within the Nagaro Group of 15.8 million euro that was formerly under other non-cash income and expenses into net cash flow from operating activities. And this is leading to a positive impact on it and a corresponding decrease in effects of exchange rate changes in cash and cash equivalents. For Q1 and first half 2025, this reclassification has a positive impact on net cash inflow from operating activities with a corresponding negative impact and effects of exchange rate changes on cash and cash equivalents of €7.4 million and €15.9 million, respectively. The numbers for comparable periods in 2024 are not material. Overall, there's no change in cash and cash equivalents and total changes in cash and cash equivalents in the statement of cash flows for Q1 and the first half of 2025. Cash flow for the nine-month period ended September showed a total cash outflow of 49.2 million euro versus an inflow of 33.1 million euro for the comparable period last year. Operating cash flow for the current nine-month period increased to 77.1 million euro versus 64.9 million for the comparable period last year. This was primarily due to other non-cash incomes and expenses of 7.2 million euro. Days of sales outstanding improved from 88 days at year-end 2024 to 85 days at the end of September. Kindly note that we calculate DSO based on quarterly revenues and include both contract assets and trade receivables. Cash flow from investing activities for the current nine-month period was an outflow of 8.9 million euro, and CapEx was 6.1 million euro. That's less than 1% of nine month revenue, which reflects our asset light model. Cash outflow from financing activities for the current nine month period was 117.4 million euro, mainly due to purchase of treasury shares amounting to 50.1 million, net repayment of bank loans of 24.3 million, lease payments of 16.6 million, interest payments of 13.8 million, and a dividend paid during the period amounting to €12.6 million. Turning to our capital allocation initiatives, which are designed to create shareholder value, we bought back a total of 684,000 shares. That amounts to €50.1 million. And we were pleased to announce this morning that we're continuing the buyback program and intend to acquire up to €20 million worth of shares. In addition, we plan to redeem approximately 75% of the roughly 1.1 million treasury shares currently held to enable further share buybacks and adjust capital levels to appropriate levels for the company's business needs. We announced a pay and paid a dividend of one Euro per share amounting to 12.6 million or 13.1% of 2024 EBIT. This was declared during our AGM in June. and we expect to sustain our dividend policy of distributing between 10 and 20% of our EBIT annually. Our inorganic growth strategy remains highly disciplined, and it's focused on synergistic tuck-in opportunities rather than large transformative M&A. These smaller strategic acquisitions are crucial for filling specific technological, geographical, and client-specific gaps. And we believe this measured approach ensures rapid integration, minimizes operational disruption, and provides a clear path to immediately enhance our service portfolio and deepen client value. And with that, I'll hand it back to Manas.

Thank you, Michael. Now, we've spent the first half of this call talking about all the good work we have done in the recent past. I would like to shift gears and look towards the future a bit. We believe that in the next few years, every company in every industry will have to find significant double-digit productivity gains. Competition around this will heat up. A company without a clear path to realizing these productivity gains with AI will be lost. It will be a bit like a consumer company without a website in the 90s or 2000s or today a consumer company without a social media presence. So this productivity movement is a big transformation ahead of us that will cut across each and every industry. Now, as you know, Tagalog has been a big proponent of agile and we have helped a large number of our corporate clients make the move to agile. In the next years, we're gonna help them make the move to what we call Fluidic Intelligence. Let me spend a few minutes explaining what we see as Fluidic Intelligence. When we say Fluidic Intelligence at Tagalog, we're describing a fundamental shift in how individuals, technology and enterprises will operate in the age of AI. It's a deep rethinking of how human judgment and machine capability will come together to create step change outcomes. So let's talk with individuals and take the example just of engineering, of software engineering. So there's a big revolution ongoing in the software front, as you know, where engineers are no longer just writing code, they're orchestrating entire systems alongside AI assistants and agents. They're debugging complex distributed systems faster, they're exploring architectural options that they would not have considered otherwise, and shipping microservices in days instead of weeks. But the real shift is that the nature of work has changed. You know, the engineer is now the decision maker, the strategic decision maker, setting direction, applying judgment, teaching the AI what good looks like in that project's context. And the result is a seamless and fluid collaboration between the human engineering intuition and the AI capability. And we believe that this is the way the future will work and all individuals and teams that are not working this way will be simply too slow to compete. And this is what we call floating intelligence at the individual or small teams level. But if you look then beyond this at technology inside large enterprises, most organizations sit on 10, 20, 50 years of operational knowledge. Much of it is trapped in systems that only some experts understand or it's in the heads of managers or experts or buried in some spreadsheets or logs. And when an issue takes place, whether it's a quality issue, a supply chain issue, or whatever, the disruption just has to trigger teams spending days piecing together this tribal knowledge from here and there to diagnose what's going on. With fluid intelligence, AI can surface the right insight at exactly the right moment by understanding every bit of adjustment, anomaly, recovery pattern that's stored across the enterprise historically, So the real unlock isn't just data, it's the accessible contextualized decision-raising knowledge. And this is the technological dimension of loaded intelligence. But it goes beyond technology to the enterprise itself. Most organizations are like cities that grew organically. They are built with a certain old context in mind. The departments that don't talk to each other, they work in silos. They have independent objectives, independent incentives, independent budgets. Workflows create friction and information moves slowly. And even a simple change to a simple topic may take weeks or months and may require many changes to many systems. And in this friction-free future enterprise that we see powered by fluidic intelligence, that same scenario is intelligently orchestrated end-to-end in minutes or hours, pulling context on the right systems, checking constraints, routing decisions to the right humans, automating everything else. So fluidic intelligence for us in some is at one level human-AI collaboration, at one level the knowledge fluidity across different technology platforms, and the third is like the friction-free flow at the enterprise across departments. And we think it's the architecture of how the next generation of intelligent organizations will operate. Now, given Nagarro's own context of not only being an agile organization software engineering company, but trying to build an agile company. Given our deep engineering expertise, given our history of engaging with clients on agile transformations and other complex and challenging cultural topics, I think this is work we are uniquely positioned to deliver. Now, in a minute, I'll show an example of what periodic intelligence looks like in practice, because the best way to understand it is to actually see an example. But first, A few words on how we are going to deliver it using special intellectual property that we have developed. What we are doing is we have, in the past several months, centralized our IT investments that used to exist in the BU silos. We have consolidated them, all these AI accelerators and platforms, into a portfolio that we call the Fluidic Forge. At a high level, it includes four streams of activity broadly. The first is the operational intelligence to run the business where work actually happens. This is the front line with orders and fulfillment and exceptions and incidents. And you want to bring predictability to the messiest part of operations, which is this. The second is more around decision planning intelligence, which is where strategy and math come together to improve the business. The third is around the technology integration and orchestration across the ERP, CRM, order management, warehouse management, finance, HR, and whether it's legacy mainframes or the latest data platforms by using agents that work across systems and inside every workflow. And the final pillar is the modernization of the mission-critical core of data across legacy mainframes as well as data platforms. So this vision is about what an organization needs to do to move to this new world. It's not about small pilots in some corner, but rather about transforming the enterprise end-to-end And we feel that Nagano is just the right size. We are big enough and embedded enough at our clients to take on such transformational work, but we are also technical enough and agile enough to work on every little piece that needs to come together for this transformation at our clients. Now let's take a real-world example of how this transformation is achieved. And this example is the example of Dublin Airport and of modernizing Dublin Airport's operations. And I believe most of us would be frequent travelers, frequent air travelers. So we will be able to relate to this example. Dublin Airport is Ireland's national gateway and the 12th largest airport in Europe. It handles over 30 million passengers annually. It operates with a highly dynamic system with thousands of different processes. It's interdependent, airside logistics coordination, retail management, security, ground transportation, and so on. And every decision impacts passenger experience, safety, and operational agility. Now, despite its evidence and the scale of the airport, it has faced frequent disruptions and challenges in decision making. Data critical decision making scattered across high load systems, baggage handling, for example, passenger information, for example, gate management, air traffic control, ground operations, and many more. And this fragmentation resulted in delayed awareness, reactive operations, and inefficiencies. And a lot of the operational intelligence of the airport was not in the systems, but passive knowledge held by experienced staff in sites that were not captured or shared across teams. And to manage this complexity as the airport planned to scale, it needed to evolve into a fluidic system where data, decisions, and intelligence flow seamlessly across teams and technologies. So this is what Nagaro did. We came in, mapped the airport as a single connected system. We revealed the fragmentation across these different operational and decision-making layers, we identified these critical knowledge assets and key friction points that were limiting the agility and cross-functional decision-making, such as challenges with operational command visibility and unified control into flight operations, passenger operations, the limited ability to anticipate passenger flows or peak loads or queue congestion, and not being able to drive retail and other non-aeronautical revenue and leaving money on the table and not being able to optimize the utilization of pavement and assets, stands, taxiways, runway users, and so on. And we used the Fluidic Forge AI accelerator that I just talked about to address these section points, creating this sort of connected intelligence and predictive control and optimization with measurable business outcomes. Now, I won't go into the details, but the airport has now much more data streaming, real-time, event-driven dashboards, AI models for flow prediction for congestion alerts. And these are integrating all kinds of data, like weather data or airline schedules or how people are coming through security and so on. There's agent-based modeling for dynamic workforce planning. There's a digital twin of airfield operations. There's AI maintenance schedulers and so on. And the outcomes are, of course, how everything is optimized, how airlines use the airport, how the revenue and yield from retail locations is optimized. efficiency, ground handling, better experiences for passengers. And if you think about it, it's also going to drive better regulatory compliance and also agility to respond to things that may happen in the environment, which all comes from this unified data fabric with intelligence sitting on top of it. And this collaboration with Dublin Airport is not a one-off thing. It continues as the airport expands its AI native capabilities from passenger flow forecasting and retail intelligence and and so on to sustainability analytics and other new frontiers setting this global benchmark for fiction-less airports of the future. So in this example, we talk about how we brought fluidic intelligence to this airport, to Dublin airport. But from the vantage point of where Dagobah sits, we have like hundreds of such clients. We have this opportunity to deliver similar results on data and AI to many great clients across various industries. And as you know, we are privileged to work with some of the world's most recognized and forward-thinking companies. Companies that are not just leading their industries today, but actually reimagining what the future will look like across how we live, how we move, how we work, how we bank, how we connect, and so on. And these are loyal clients. These are not just one-off partnerships. These are loyal clients who work with us year after year They include, for example, three of the top luxury car manufacturers, three of the top five global leaders in industrial automation, five of the leading global retailers, two of the top three global hotel groups, two of the leading global cities, and then there are these niches like almost half the top banks in the Middle East, three of the top four management consulting companies, and so on. I could just go on and on, right? So there's a huge... base of loyal clients where we can bring these capabilities to them. And with these clients, we will work towards the future. We'll work towards inventing what comes next. And with that sort of framing of where we sit and this peek into how we see Nagaro evolving into the future, maybe we transition to the Q&A.

Maybe the operator can switch the Q&As.

Thank you very much. We will now begin the Q&A session. You can register a question by pressing star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2 on your telephone keypad to remove yourself from the question queue. And if you've joined us online, you can submit a text question via the Q&A button on your browser. Our first audio question comes from Nicholas David from AutoBHF. Your line is open, Nicholas. Please go ahead.

Yes, good afternoon, Manas and Michael. Thank you for the presentation. I have a few questions. The first one is regarding the overall environment. You said that the demand is still soft, but I understand that this comment is more on a nine-month base because, I mean, you showed a pretty good Q3, both on the year-on-year basis, but also on the quarter-on-quarter trend. So did you see, nevertheless, an improvement in the trend recently? And how do you see Q4? Do you see further improvement or are you worried about potential big furlough by the end of the year? So my first question would be around the overall environment. And regarding that also, could you comment please on the pricing environment? Some of your competitors have been mentioning further pricing pressure, be it linked or not to the AI evolution. And my last question is regarding the profitability. If we take the mid-range of your annual guidance, it implies 14% EBITDA margin. Excluding the write-off of your intercompany loan, it would be like 15.8%. Is this profitability level sustainable for the next years, or do you need some investment? Is that something that could push downward the margin for the next year? Thank you.

Thank you, Nikola, for these questions. And I'll take them one by one. I think that the demand environment is still soft, but I think the degree of clarity and confidence that now exists about where AI is going to take us has not been there for a long time. So it's difficult to predict how the quarters will look. But I think the three-year, five-year horizon is really bullish now. I would even say bullish because the transformation is here. I think we had this period when the technology had been introduced. There were lots of questions about whether it would be capable enough to bring about changes, how it would impact the IT services sector, and so on. I think these questions are by and large behind us. I think there is a fair amount of tangibility into how the future will look. Q4 is a quarter with fewer working days, typically. So there is some of that. And again, I would not want to predict quarters, but I think that in general, the outlook is bullish. In terms of pricing pressure, I think there's pricing pressure in large multi-year deals because there's some doubt about where the productivity improvements will take us. But I think that in general, Nagaro's business is still a majority T&M business, and we don't see that much pricing pressure there as maybe in multi-year managed services deals. Finally, in terms of profitability, I think a couple of years ago we had said that we We believe that when we spun off the company, we said that 15% adjusted EBITDA was our target. Then a few years later, we said 18% is where we want to gradually get to. I think that's where our target is. I think that we will need to make some more investments, but we also see still a lot of opportunities to rationalize our costs and to pool our resources and make more targeted bets. So I think that we do expect profitability to keep improving in the years to come.

Thank you very much for the question, Nicolas.

Thank you.

And if I may, regarding the outlook, you mentioned more the AI visibility driving the demand. Do you really believe that it's really technology and AI which has been driving up and down the demand more than the macro itself? Is macro still an important role to play? And if so, what is your view regarding the macro? Is it really unchanged there or slightly better?

That's a great question, Nicolas. I think that there have been periods in the last few years where the macro has played a role. But in general, I think technology is seen as a must-invest technology. when it becomes critical to competition. And I think we are entering a phase where it will become a must-invest when it comes to productivity improvements. That's why I'm very bullish about this. I don't think that companies will pare back their budgets only to spend more money in terms of reduced productivity. So I think the technology changes will trump the macro.

That's my personal reading.

Our next question comes from Fabio Holscher from MM Warburg.

Your line is open, Fabio. Please go ahead.

Yes, hi. Hi, Manas and Michael. Thanks for taking my questions. Starting with maybe, can you confirm that the sequential margin improvement now in Q3 was mainly driven by FX in the other operating result compared to Q1 and Q2, and then how we should think about FX revaluation risk going forward? That's my first question. And then second question, can you comment on what drove the decision to redeem the 75% of treasury shares now and how aggressive you plan to be with the 20 million buyback?

Sure.

So the margin improvement is a secular trend. the underlying margin improvement. The reported adjusted EBITDA margin, because we don't correct for this re-evaluation of intra-company loans, it has shown a weakness in the first two quarters. But with the adjustment, you can see that there's a secular trend of being over 15% and now in the 17% range. So I think that the re-evaluation risk remains if the dollar drops dramatically against the Euro, then the adjusted EBITDA margin that we declare will be affected. On the other hand, if it rises, it will be affected. But I think we're also going to be talking to our auditor about potentially restating our adjusted EBITDA to account for this intra-company loan topic because we think it's distracting and doesn't fully reflect the operations of the business. So that's that. I think in general, the margin improvement is not predicated on effects. It's actually the underlying effect is really about all the operational efficiency that we're working towards. On the redeeming the 75%, you know, we keep looking at our balance sheet from time to time and monitoring it and seeing what's best. And at the moment, we have, I mean, currently we've decided to redeem 75%. And the share buyback, I think we have certain regulatory, I think how much we can buy on any single day, but we will be trying to buy this 20 million as soon as possible.

Thank you.

And if I may squeeze in one more, can you elaborate on your growth plans and fluidic intelligence, how that is concentrated in the specific verticals or geographies, which ones you maybe prioritize? Thank you.

Thanks. So we are actually in the middle of a strategic review, and we will have more clarity by the beginning of next year. But in general, if you look back over the last years, we have seen that the US and Germany continue to be our largest markets. And we see excitement across the Middle East and Japan. So I think these are the markets where we have the real focus. And outside that, in terms of verticals, We are doing very well in industrial and we're doing well in retail and CPG, life sciences. There are a few verticals that we can easily see that are bucking the trend. And then there are some verticals which are really big for us and really important like banking, for example, or automotive to some extent, even if they're not doing very, very well at this particular moment. I think that in general, we've already started to shift away from some of the verticals that we used to report, like horizontal tech. I think for the last five years, we've been kind of shifting away from that. But there may be a few others that we decide at least not to invest too much in. It's not that we shut down accounts or anything like that. I think it's just that we don't want to be playing in a tight market where we have a very good chance of winning. And that's the philosophy going forward. So the company has been a very entrepreneurially given company, but we also have the ability, I believe, to be strong and to take decisive decisions centrally to steer it in certain directions. And that's kind of what we have been kind of playing out in the last few months.

Great. Thank you. Thanks, Javier.

As a reminder, to ask an audio question, please press star followed by one on your telephone keypad now. I'd now like to hand over to Michael for the text questions.

Great. Thanks, Sammy. So first question, Manas, says congratulations on strong quarterly results and clarity of the presentation. Wanted to ask about the recent significant reduction in equity through the cancellation of Treasury shares. Can you elaborate on the strategic objective behind this move? and how we should interpret it in the context of your future capital allocation policy.

Thanks, Michael. I think it's just an assessment of the levels of capital needed to run the company, and that's the reason for the extinguishing of the shares. And our capital allocation policy continues along the lines of what we have described before, we will take a good look at it with the new CFO in place and come out with a fresh update. But at the moment, we're in line with the current capital allocation policy.

I don't see this as a departure.

Great. Thanks, Manas.

The next question is in two parts. First is, can you please elaborate on your strong expense control, noting that your SG&A declined by 12 million euros sequentially? And then secondly, can you explain what changes were made to the stock compensation and incentive plan, which was called out as 11.5 million euros in your quarterly report? Were those related in any way or discrete items?

So on the first, I think the main changes we have made is to try to push towards a certain minimum margin in every business unit. And what this has led to has been streamlining of the spend that we have in practices which are mainly sales and pre-sales oriented. I think that when we spun off in 2020, our target was that we would aim for 15% EBITDA and really invest in practices and capabilities to drive a global footprint across different industries. Because that was the nature of the situation, we found ourselves beautifully placed to ride the wave of digital transformation And we felt that we should take full advantage of that wave to build out as many footprints as possible across different industries and different verticals, different offerings. And what this is, is a little bit more of a rationalization. It's also a realization and recognition that the AI revolution is going to be a lot more common to different industries. So it's better to invest in a central way than in all these different practices across different views. So that's the main theme. On the stock compensation and incentive side, my guess is that's coming from just re-evaluation based on stock options, etc. But I'm not totally sure.

Maybe we can reconnect separately and go over that line item.

Great. Thanks for that, Manas. Next question is a three-parter. Do you have any visibility on returning to double-digit growth in 2026? And then what free cash flow conversion target do you have for the coming quarters? And do you have an estimated net debt level by year-end?

Sure. So, you know, we –

We don't like to predict the short term future. It's always more difficult and volatile. But I think that double digit growth in the medium term is absolutely where we need to be at. And we don't know when it will come, but the company is just gearing up to ensure that no matter what the market conditions, we are able to deliver that. And that's the first part. It involves a lot of different changes that we are making to the way we run our business units, but also the way we run our different geographies and the way we run key accounts and the playbooks we use and how sales are organized. But that's definitely something in our future. In terms of FCF, we don't set targets because the faster you grow, the more your cash flow suffers. So we are really focused more on... on growth and margins rather than SCF. And in terms of net debt level, you know, we have obviously an outer bound that we have always declared of, you know, three times adjusted EBITDA, but typically we like to steer it at the, you know, at the 2x EBITDA level to keep that as a, and maybe go up a little bit beyond that, but 3x is the outer bound. We don't expect the net debt level to change significantly. I mean, let me not give a prediction for the year end, but, you know, that's a general approach to stay, you know, around the 2x mark. Or rather, you know, it's actually also a question of how much cash we want to keep. And typically we're trying to keep between 100 to 125 million of cash across our different offices.

So that's kind of where we kind of end up with the net debt.

Great. Thanks for that, Manas.

Next question would be, we're seeing big tax implications that the dividend payment had this year. Are you exploring ways to improve this?

Yes, we have been, of late, transferring cash that was at different parts of the organization upstream towards the FEE. And there have been some tax implications of that. And yes, we are definitely working on how to reduce those and normalize those in the years to come.

Okay.

The next question is, the current narrative for the sector seems to be that AI could disrupt the IT sector, implying clients are focusing most of their budgets on hyperscalers. meaning that could be less for companies like Nagara. Could you please share your view on this?

No, I don't think that's the right way to think about it personally. I think that if you want to use more compute and do more things with technology, you need to know what you are doing, right? So the challenge is not in... It's not just a... question of harnessing more chips. But as each one of us knows, enterprises are horribly complex. And the example of Dublin Airport is one example that we all can relate to. But I think we see similar frictions in every experience that we have, whether it's at a hospital chain or insurance or banking. There are all these different frictions that we have all in cities and governments and so on. And I think the opportunity to actually drive change with AI and with what we call fluidic intelligence is going to be dependent a lot on the people who get it done, who have done this at many other companies and they can bring it to you and they can tell you how it's done, what works, what doesn't work, and that can actually design it in a way that doesn't lock you in as a customer, that keeps you flexible to process to jump on the next wave of innovation that happens. So I don't at all believe that IT services is, or the IT services sector is going to be depressed. I think it has, you know, a good room to grow. There's of course intermediate adjustments that we have been seeing in the last couple of years, but I don't think that this, I'm very excited about the medium term outlook for the sector.

Okay.

The next question is, should we expect the headcount to keep on rising in the following quarters?

We try to, again, I'm always very wary of giving predictions. I think we do. Personally, I would say, I guess, headcount will keep rising gradually. But it's a lot more about what we do with people than predictions. the number of people that are deployed. So there is a big change to retrain, to improve the productivity, the people we already have, and then to choose a different kind of person when you're hiring. So for example, in India, our fresher hiring, which we hire the most people fresh from colleges, has now moved to the AI business unit so that the people that we are hiring are all AI native. And we see that there's a whole new level of capabilities that people like that can bring. So I think it's a reorientation of how people are added to a company, but I don't think it's an end of people growth. We do expect the growth to be a bit more conservative in the next few quarters, but maybe picking up after that.

Perfect. Thanks for that.

The next question is, what impact will the potential hire act in America have on your business?

At the moment, we don't expect any significant impact, but we keep waiting and watching.

We don't expect any significant impact.

Okay. And the next question is, how much growth is expected to come as a percent of revenues from joint ventures in Japan? And when will we start to see them contributing to revenue? That's an interesting question.

So whether it's joint ventures or partnerships, I think we are going to have like double-digit millions next year and hopefully triple-digit millions in a few years. So we have a very strong pipeline. As we know, the Japan is a complicated environment to work in because there are cultural nuances, there are language topics, and that's why the acquisition that I just mentioned briefly is important because it allows us to work globally with a language-trained workforce, for example. So I think we're putting the pieces in place and we have the pipeline and we expect it to take off in the next year or two, but I must say that at this moment we probably have already a three-digit number of leads, an opportunity for separate projects that we are looking at.

Great. And the final question is around conversations with your clients for 2026 digital transformation spending. How are those evolving so far? I know it's still early and companies are finalizing their 2026 budgets, but according to conversations so far, they are still conservative or do they look more optimistic about ramping up projects next year?

I think that in general, it is better than we have seen it for the last few years. But, you know, I won't say that spring is here and summer can't be far behind. I think that it is definitely a stronger base than we are projecting out than we have had in any of the last few year ends. But let's wait and see. I don't want to go out on a limb and forecast a recovery, but it does look better than it has been in the last years.

Great. Well, thanks for your feedback on those points, Manas. I want to thank everyone for joining us today. We really appreciate your interest in Nagara, and we look forward to connecting with you again soon.

Thank you very much.

Thank you, everyone.

This now concludes Nagara's Q3 2025 earnings call. You may now disconnect your lines.